Kinder Morgan, Inc. (KMI)

Kinder Morgan, Inc. (KMI) owns the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P. (KMP).

The Partnership (KMP) is a publicly traded pipeline limited partnership. For the past decade The Partnership (KMP) has delivered annualized total returns of 19.50 % to its unitholders. The company hopes to capitalize on growth in domestic natural-gas production from shale to increase dividends to its shareholders.[1]

Kinder Morgan Management, LLC. (KMR) is the subsidiary that manages the partnership (KMP). Kinder Management (KMR), has no properties and its success is dependent upon its operation, management and resulting performance of the partnership (KMP).[2] Kinder Management (KMR), does not pay distributions on its shares in cash but instead makes distributions on its shares in additional shares or fractions of shares. [3] KMR usually trades at about a 10% discount to KMP, raising the yield. By owning KMR a shareholder gets tax defered compounding of distributions. [4]

What Kinder Morgan does

Kinder Morgan accumulates positive cash flow projects that will be accretive to dividends. That is, each project increases the pay out to shareholders. The more they spend, the more they pay out. They buy things that will last a long time, sell the capacity, and pay it off in a short time. Then they resell the capacity, over and over again. Investors are expected to focus on dividends and the expected growth of those dividends over time. It is a take or pay business.

If in the future Kinder Management (KMR) ceases to manage and control the Partnership (KMP), they may be deemed to be an investment company under the Investment Company Act of 1940. [6]

Richard Kinder, Chairman of the Board and Chief Executive Officer takes a salary of $1 a year and accepts no stock options. “Our goal is getting everybody to think, ‘How would I spend the money if it was my money?' ... Whatever I do, if it is good for shareholders, it is good for me, and vice versa.” [7]

Three Kinders

The three Kinder Morgan companies (Kinder Morgan Partners (KMP), Kinder Morgan incorporated (KMI), and the Kinder Morgan management company (KMR), own the same assets: 38,000 miles of natural gas and product pipelines, and 180 terminals. [8]The only cash flow that the management company (KMR), gets is from its ownership of Kinder partners (KMP) shares. Investors in the management company (KMR), do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for Kinder partners (KMP) and the management company (KMR), are equal; the only difference is that KMR distributions are paid in the form of additional shares, reducing the need for the Kinder partners (KMP) to raise public equity, or borrow funds.

The corporation’s (KMI) growth, is driven by Kinder partners (KMP), which currently accounts for approximately 98 percent of the distributions that the corporation (KMI) receives. The corporation (KMI) can then drop down some of the El Paso assets to Kinder partners (KMP). The cash from sales to the Kinder partners (KMP) will be used to reduce the leverage used to buy El Paso in the first place. Some of El Paso’s assets will also be sold as cash, or spun off into a separate company and sold. But the assets are so widely spread out geographically that a spin-off is less likely.

The partners (KMP) has to pay out all of there earnings. So the only way any MLP can get cash is to borrow it, or sell something. Kinder partners (KMP) have to get the cash up to pay dividends anyway. Some they pay to the corporation (KMI) who pays the funds out to shareholders. Rather than receiving and distributing cash, the management company KMR, receives and passes through a dividend in shares known as paid-in-kind distributions. Kinder partners (KMP) the cash that would have been paid out as dividends, to buy assets from the corporation (KMI) and finance acquisitions internally. Over $490 million of the equity required for this investment program is expected to be funded by the management company’s (KMR) dividends. [9]

Midstream Two-Step

The corporation (KMI), is buying El Paso corporation (EP), which owns and operates natural gas transportation pipelines and storage assets. El Paso Corporation (EP) is a natural gas company involved in oil and natural gasproduction and natural gas transportation. EL Paso owns the largest interstate gas pipeline system in the U.S., and is responsible for transporting a quarter of all the natural gas used in the country every day. [10]

Generally the general partner (KMI) buys a corporation with lots of pipeline assets. Then the corporation sells the assets to its own master limited partnerships (KMP and EPB). The drop-downs move the pipelines to a more tax-efficient partnership structure, and are priced at a level that guarantees cash flow accretion for the partnerships. The corporation takes the proceeds from the asset sale and pays down its acquisition debt, with a goal of holding zero parent-level debt upon completion of asset drop-downs. It works as long as a general partner doesn't pay more for assets than it can charge its partnerships and still have the drop down be cash flow accretive. [11]

Investors

The three Kinder Morgan companies Kinder Morgan Partners (KMP), Kinder Morgan incorporated (KMI), and the Kinder Morgan management company (KMR), own the same assets: 38,000 miles of natural gas and product pipelines, and 180 terminals. [12]

The corporation (KMI), is buying El Paso pipeline partners (EP), which owns and operates natural gas transportation pipelines and storage assets. The El Paso transaction is expected to be nicely accretive to dividends of all three companies. [13]

The corporation’s (KMI) growth, is driven by Kinder partners (KMP), which currently accounts for approximately 98 percent of the distributions that the corporation (KMI) receives. The corporation (KMI) can then drop down some of the El Paso assets to Kinder partners (KMP). The cash from sales to the Kinder partners (KMP) will be used to reduce the leverage used to buy El Paso in the first place. Some of El Paso’s assets will also be sold as cash, or spun off into a separate company and sold. But the assets are so widely spread out geographically that a spin-off is less likely.

The Partners (KMP) has to pay out all of there earnings. So the only way any MLP can get cash is to borrow it, or sell something. Kinder partners (KMP) have to get the cash up to pay dividends anyway. Some they pay to the corporation (KMI) who pays the funds out to shareholders. Rather than receiving and distributing cash, the management company KMR, receives and passes through a dividend in shares known as paid-in-kind distributions. Kinder partners (KMP) the cash that would have been paid out as dividends, to buy assets from the corporation (KMI) and finance acquisitions internally. Over $490 million of the equity required for this investment program is expected to be funded by the management company’s (KMR) dividends. [14]

One of the reasons the management company (KMR) sells at a discount to the partnership is because the management company (KMR) pays dividends in shares based on the management company’s (KMR) average closing price for the 10 trading days prior to the management company’s (KMR) ex-dividend date. [15] But when you reinvest a cash dividend you buy at the ex-dividend price.

“KMP’s stable and diversified assets continue to grow and produce incremental cash flow in virtually all types of market conditions. We see exceptional growth opportunities in the midstream energy sector, particularly in the natural gas shale plays and in the coal export business.” ~ Chairman and CEO Richard D. Kinder [16]

“Kinder has made a low-return, humdrum business into a river of money.” ~ Robin West, consulting firm PFC Energy. [17]